When was the last time you reviewed your beneficiary designations? If it’s been a while—or if you can’t remember—it might be time for a check-up. While many people believe that their will or trust dictates how all their assets are distributed, beneficiary designations on financial accounts and insurance policies often override those legal documents. Failing to keep these designations up to date can lead to unintended consequences, family disputes, and even costly legal battles.
What Are Beneficiary Designations?
Beneficiary designations specify who will receive certain assets upon your passing. These are commonly used for:
- Retirement accounts (401(k)s, IRAs, pensions)
- Life insurance policies
- Pay-on-death (POD) or transfer-on-death (TOD) accounts
- Annuities
- Health savings accounts (HSAs) and brokerage accounts
Unlike assets that pass through a will or trust, accounts with designated beneficiaries transfer directly to the named individuals without going through probate.
Why Regular Reviews Are Necessary
Your estate plan should evolve with your life circumstances. Failing to update beneficiary designations can result in outdated or unintended choices. Here are some key reasons to review your designations:
- Life Changes Affect Your Choices
Significant life events—such as marriage, divorce, birth, adoption, or the passing of a loved one—may impact who you want to inherit your assets. For example, if you’ve remarried but your ex-spouse is still listed as the beneficiary on your life insurance policy, they could receive the payout instead of your current spouse.
- Your Beneficiaries’ Circumstances May Change
A named beneficiary may face financial difficulties, divorce, or health issues that impact whether direct inheritance is in their best interest. If a beneficiary has special needs, leaving them assets directly could disqualify them from government benefits. In such cases, updating your designations to name a special needs trust may be a better solution.
- You May Need to Coordinate with Your Estate Plan
Estate planning is about ensuring assets are distributed according to your wishes. If your beneficiary designations don’t align with your will or trust, your estate plan may not work as intended. For instance, if you have a trust set up for your children but your retirement account names them directly, those funds may bypass the trust’s protections.
- Minimizing Family Disputes
An outdated or ambiguous beneficiary designation can create confusion and conflict among loved ones. Ensuring your records are current can help avoid legal challenges and prevent disagreements that could harm family relationships.
- Ensuring Contingent Beneficiaries Are Named
Many people name a primary beneficiary but forget to designate a contingent (backup) beneficiary. If the primary beneficiary predeceases you and no contingent is listed, the asset may go to your estate, potentially subjecting it to probate and unintended tax consequences.
- Avoiding Unnecessary Taxes and Delays
Certain beneficiary designations can have tax implications. For example, naming a non-spouse beneficiary on a retirement account may require them to withdraw funds over a limited timeframe, potentially increasing their tax burden. Regularly reviewing your choices with an estate planning attorney can help ensure your beneficiaries receive assets in the most tax-efficient manner.
How Often Should You Review Your Beneficiary Designations?
It’s a good practice to review your designations:
- At least every few years as part of a general estate plan review
- After major life events, such as marriage, divorce, birth of a child, or the death of a beneficiary
- When you change jobs (as this may affect retirement accounts and insurance policies)
- When you establish or revise a trust
Beneficiary designations are a small but powerful component of your estate plan. By ensuring they are current and aligned with your overall planning strategy, you can protect your loved ones and avoid unintended complications.
If it’s been a while since you last reviewed your beneficiary designations, now is the time to ensure they align with your wishes. At Eastham Law Offices, we can guide you through the process, help coordinate your assets, and provide peace of mind that your estate plan is in order. Call us today at 561-395-6800 or fill out our online contact form to schedule a consultation.